The Role of Betting on Digital Credit Repayment, Coping Mechanisms and Welfare Outcomes: Evidence from Kenya
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International Journal of Financial Studies Article The Role of Betting on Digital Credit Repayment, Coping Mechanisms and Welfare Outcomes: Evidence from Kenya Richard Chamboko 1,2,* and Sevias Guvuriro 3 1 International Finance Corporation, World Bank Group, Washington, DC 20433, USA 2 Institute for Intelligent Systems, University of Johannesburg, Johannesburg 2092, South Africa 3 Department of Economics and Finance, University of the Free State, Bloemfontein 9301, South Africa; [email protected] * Correspondence: [email protected] Abstract: Digital financial services and more importantly, mobile money, have become an important financial innovation to advance financial inclusion in developing and emerging economies. While digital financial services have improved the lives of many Kenyans, to the growing betting segment of the Kenyan population, these innovations have also brought great convenience to betting. The innovations have allowed easy access to digital credit which can be used for betting. Despite betting or gambling being a widely studied area, particularly in developed countries, little is known about its interaction with financial innovations such as digital financial services in developing and emerging economies. Using data from a 2017 digital credit survey in Kenya, this study investigates if bettors are more likely than non-bettors to be financially distressed or engage in welfare-undermining coping strategies and potentially experience inferior welfare outcomes. The study uses a representative sample of 1040 digital borrowers, of which 304 were digital bettors. Using multivariate logistic regressions, the study found that, after controlling for socio-economic and demographic factors, bettors are significantly more likely than non-bettors to be financially distressed, engage in welfare Citation: Chamboko, Richard, and undermining coping strategies, and have inferior welfare outcomes. Sevias Guvuriro. 2021. The Role of Betting on Digital Credit Repayment, Keywords: digital financial services; digital credit; betting; financial distress; coping strategies; Coping Mechanisms and Welfare welfare outcomes Outcomes: Evidence from Kenya. International Journal of Financial JEL Classification: D60; E42; E51; G23; G29; O12; O33 Studies 9: 10. https://doi.org/ 10.3390/ijfs9010010 Received: 7 August 2020 1. Introduction Accepted: 18 November 2020 Published: 1 February 2021 Digital financial services, and more importantly mobile money, have become an im- portant financial innovation to advance financial inclusion in developing and emerging Publisher’s Note: MDPI stays neutral economies. The advent of digital financial services has provided those who are marginal- with regard to jurisdictional claims in ized, traditionally financially excluded, and occupying the lower rungs of a socio-economic published maps and institutional affil- status ladder, with an opportunity to partake in the formal financial system. Increased iations. financial inclusion has become possible due to deliberate policy interventions, the growing availability of mobile phones (including smartphones), and internet connectivity in devel- oping and emerging economies (Chamboko et al. 2018). Individuals can remotely access financial services through their phones and hence enjoy improved convenience, improved accessibility, and reduced costs of using financial services (Chamboko et al. 2020). Copyright: © 2021 by the authors. Licensee MDPI, Basel, Switzerland. A growing body of literature also reports a positive and significant impact of digital This article is an open access article financial services on household welfare outcomes. Digital financial services facilitate distributed under the terms and a stable path of consumption amidst financial and income shocks (Suri and Jack 2016) conditions of the Creative Commons and increase per capita consumption levels, thereby reducing poverty levels in the long Attribution (CC BY) license (https:// run (Munyegera and Matsumoto 2016; Suri and Jack 2016). Wieser et al.(2019) show that creativecommons.org/licenses/by/ digital financial services increase the likelihood of poor rural households to send and 4.0/). receive peer-to-peer cash transfers, reduce the cost of remittances, reduce food insecurity, Int. J. Financial Stud. 2021, 9, 10. https://doi.org/10.3390/ijfs9010010 https://www.mdpi.com/journal/ijfs Int. J. Financial Stud. 2021, 9, 10 2 of 12 and increase non-farm self-employment. Msulwa et al.(2020) also show that access to formal financial services such as savings, credit, and insurance has a positive and significant impact on consumers’ asset holding. In the Kenyan financial market, the availability of financial services through mobile money services is widely celebrated as it has led to the growth of financial inclusion from 26.7% (2006) to 82.9% (2019) (Central Bank of Kenya et al. 2019). With increased access to digital credit in Kenya, consumers can conveniently access loans on their digital platforms, particularly mobile phones, and can use the same channels to make payments and store value. About thirty-four percent of the mobile-phone-owning Kenyan adult population (77% of the adult population) had once taken a loan through a mobile phone (Gubbins and Totolo 2018). Importantly, the number of digital loans has surpassed that of traditional loans at a ratio of about 10:1 by 2018 (MicroSave Consulting 2019). While digital financial services have improved the lives of Kenyans, the rise in digital credit provisioning has nonetheless facilitated access to cash that can be used for betting. Gambling in Kenya takes on various forms, including sports betting (e.g., SportPesa, Betin, and Betway), casinos, pool games, bingo, phone-in-talk shows, scratch cards, and lotteries. The most common are sports betting, where bettors wager money on an outcome of an uncertain sports event with the hope of winning more money (Prasad and Jiriwal 2019; Williams et al. 2017). King et al.(2014); Gainsbury et al.(2013) and Gainsbury et al.(2012) pointed out that increased access to mobile devices (smartphones and tablets) has made some gambling activities an “anytime, anywhere” activity. A GeoPoll survey shows a startling prevalence of betting in Kenya, estimating that about 57% of the adult population (above 16 years) have participated in betting in the past, with a high prevalence among smartphone owners (Roxana 2019). Kisambe(2017) reports that Kenya (76%) leads in Sub- Saharan Africa in terms of youth gamblers, and among these youth gamblers, 96% use their mobile phones. The Kenyan FinAccess Household Survey of 2019 reports a conservative 1.9% prevalence of self-reported betting activities among mobile money users in Kenya. It is however important to highlight that the FinAccess survey could be understating the betting level in Kenya since it is an adult survey, which does not report underage bettors. In addition, the 2019 FinAccess Household Survey shows that among those who indulge in betting, 22.6% bet daily, 51.7% bet weekly, 6.9% bet monthly, and 17.1% bet intermittently, especially when there are big prizes to be won. Furthermore, close to 20% of the Kenyan adult population holds the opinion that betting is a good source of income (Central Bank of Kenya et al. 2019), and Schmidt(2020) reports that many Kenyans see gambling as a legitimate activity to earn a living in an economy unresponsive to their employment demands. The Kenyan government recognizes the potential danger that is posed by gambling in an inadequately regulated environment. The growing prevalence of betting and more so the frequency of betting among bettors can potentially have harmful effects. The government of Kenya has recently raised taxes for betting, lottery, and gaming and for companies running prize competitions from around 10% to 20%, but this has faced resistance, resulting in some of the major companies in this business closing their operations in Kenya. Continued pressure on the government resulted in outright cancellation of the tax as gazetted and signed in the 2020 Finance Bill (iGaming Business 2020). Despite gambling in general being a widely studied area, particularly in developed countries, little is known about betting, an activity gamblers engage in, and its interaction with financial innovations such as digital financial services, especially in developing and emerging economies. This study thus contributes to the literature by exploring the role of betting on digital credit repayment, coping mechanisms, and welfare outcomes in Kenya (a digitized African society). We first investigate if bettors are more likely to be financially distressed as illustrated by late repayments, having multiple loans due, failing to make all payments, and receiving reminders to repay loans. Secondly, we evaluate the possibility of bettors engaging in welfare-undermining coping strategies such as the selling of assets and borrowing to repay loans. Finally, we investigate the potential impact of betting on food and medical uptake by bettors. As far as our search is concerned, this is the first Int. J. Financial Stud. 2021, 9, 10 3 of 12 peer-reviewed paper to study the relationships between digital financial services, betting, and welfare outcomes in the form of foregoing food and medical uptake in a developing country setting. The rest of the paper is structured as follows. Section2 provides brief literature on gambling and new financial technology. Section3 discusses the data and measurements and methods employed in this paper, whilst Section4 presents results and discusses